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Are Canadian Pharmacies The Solution To America's High Prescription Drug Prices?

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A pharmacy in Toronto, where all the good cheap drugs are. Photo credit: Rene Johnston Toronto Star/ZUMA Press/NewscomEvery day for the last three years, I've started my morning with four prescription pills that cost roughly $11 each. I say "roughly" because the price fluctuates. The last time I filled a 90-day prescription, the full cost was $4,037. Sometimes, a 90-day refill costs hundreds of dollars less. But it's always expensive enough for one of the pharmacy techs at my local Rite Aid to let out a whistle when I tell them what I need to pick up.

About a year ago, someone I suggested I check out the prices for this drug in Canada. My medicine, which is called Lialda, turns out to cost thousands of dollars less just 500 miles north of D.C. Global Care RX, a Canadian online pharmacy, sells a 90-day supply of Lialda for $710, while Canadian Pharmacy King sells it for $734.

Buying prescription drugs from a Canadian website isn't legal, but many Americans do it anyway because of the government's unofficial "non-enforcement policy" for personal imports. First publicized in 1998, the policy basically says the Food and Drug Administration (FDA) will focus its enforcement efforts on unapproved imported drugs intended for commercial markets here in the U.S., and that patients who order personal amounts of non-controlled substances from foreign pharmacies will generally go unharassed.

The FDA agents seized patient records and financial information, and they copied computer files. They also asked owners to sign letters acknowledging that parallel importing of prescription drugs is illegal.

In response to the raids, Sens. Amy Klobuchar (D-Minn.) and Charles Grassley (R-Iowa) sent a letter on December 26 asking FDA Commissioner Scott Gottlieb to explain whether the FDA has abandoned its non-enforcement policy. It also asked him to support the Safe and Affordable Drugs from Canada Act, a bill co-sponsored by Klobuchar and Sen. John McCain (R-Ariz.) that would "allow for the personal importation of prescription drugs from approved pharmacies in Canada for personal use with a valid prescription."

We've been here before. In 2000, President Bill Clinton signed the Medicine Equity and Drug Safety Act, which would have allowed the importation of prescription drugs from developed countries if the secretary of health and human services certifies that importation doesn't pose a risk to U.S. consumer safety. HHS Secretary Donna Shalala and her successor, Tommy Thompson, both declined to certify that claim, and the law never went into effect.

This latest effort may also fall short, but regardless of its odds, let's talk about why Canada looks like a solution to high drug prices here in the U.S.

Let's start with the easy one: Why are identical drugs cheaper in Canada than in America?

Because Canada's government sets the prices for all patented drugs, while in the U.S. drug makers charge as much as our pseudo-free market will bear.

More specifically, Canada's Patented Medicine Prices Review Board (PMPRB) invites drug makers to submit a price proposal and sales information, and the board then compares that quote to the prices of similar therapies in France, Germany, Italy, Sweden, Switzerland, the United Kingdom, and the U.S. The drug goes to market if the company's initial quote comes in under the price ceiling established by this comparison analysis. If the company's proposed price comes in above what the PMPRB deems reasonable, the two parties negotiate. If they can't come to an agreement, the Federal Court of Canada makes a ruling. (You can read more about how Canada determines the max price for a given drug in this analysis from Springer.)

In the U.S., what you pay varies widely. If you have a high-premium insurance plan, you're likely responsible just for a co-pay. Your insurance company may cover only a generic version of the drug you've been prescribed, or a cheaper, older drug that's indicated for the same disorder (called "step therapy"); but you're likely not paying full price for any drug unless you're uninsured, on a high deductible plan, or just really want to use a formulation that your policy doesn't cover. Companies that make super-expensive second- and third-line therapies will reimburse patient co-pays, which can be hundreds of dollars a month even for people with high-premium insurance plans.

It's a different story for cash patients. People with no prescription drug coverage or who are on a high-deductible health insurance plan see the actual prices of prescription drugs. I had no idea how much Lialda cost, for instance, until I started a job with a high-deductible plan, at which point my share of the bill jumped from a $25 co-pay to several thousand dollars. While there are tricks cash patients can use to lower their out-of-pocket costs—prescription discount cards can reduce the pharmacy sticker price (though never to the level of a PPO co-pay), and filling generic prescriptions at Costco is almost always cheaper than the nearest chain pharmacy—paying cash for prescription drugs in the U.S. is mind-bogglingly expensive.

The one constant across all these pay models is that drug makers—like all private sector firms—don't voluntarily leave money on the table. Drugs that cost less in Canada are cheaper because the Canadian government won't approve a drug for the Canadian market if it costs more than a government body deems appropriate. There is no such gatekeeper in the American market, and there is arguably no way to pay significantly less for branded prescription drugs because the American health care system is not optimized for comparison shopping. This is why nearly 20 million Americans get their prescriptions from overseas.

This doesn't explains why I can't legally buy the same drug made by the same company in a similarly run factory from a first-world country where it's much, much cheaper.

Like most industries, the pharmaceutical business relies on the ability to charge different prices in different places. And as Cato's Roger Pilon noted back in 2005, that market segmentation strategy only works if pharmaceutical companies can constrain "parallel trading," a process where buyers in low-price markets re-sell prescription drugs to people in higher-priced markets. Though it's often called "drug reimportation," parallel trading is the more accurate term for what happens when pharmacies in Canada compete in the American market against the pharmaceutical companies who supply them.

The practice of parallel trading is legally protected in the European Union, where all the participating import and export countries use price controls. It hasn't been legalized here in part because America is the closest thing drug makers have to a gold mine:

In addition to a favorable IP and regulatory environment, U.S. laws allowing direct-to-consumer advertising creates immense demand for specific patented drugs. More importantly, the United States is the world's largest free-pricing market for pharmaceuticals. As a result, prices are comparatively high to make up for lower profits in other countries and to cover R&D costs. The United States also has high per capita incomes, unmatched access to healthcare, a large elderly population, a culture of end-of-life prolongation, high rates of chronic diseases and drug consumption and a strong consumer preference for innovative drugs. All of these factors contribute to it being, by far, the world's largest pharmaceutical market with $333 billion in sales in 2015, about triple the size of its nearest rival, China. The United States will remain the world's most important market for the foreseeable future with healthy growth expected across all product sectors.

Allowing U.S. consumers to engage in parallel trade would require pharmaceutical companies to lower prices here, negotiate price increases with other OECD governments, contracturally prohibit buyers from re-selling, or reduce drug sales to low-price countries so that they have no surplus to export. None of those options are as easy as lobbying the U.S. government to prevent parallel trade and preserve America's status as a lone cash cow in a world of price controls.

So what would happen if Congress legalized the purchase of Canadian pharmaceuticals?

It's difficult to say. Parallel trade between E.U. members received formal protections in 1995, and the practice in Europe is far more heavily regulated than the process put forth in the McCain-Klobuchar bill. Parallel importers in the U.K. have to be licensed and have to pay for repackaging costs. A study published by the AARP in 2005 highlighted some other regulatory provisions, namely:

(1) the EU treaty does not allow products to be parallel imported from outside of the EU (and the European Economic Area) so long as a marketing authorization holder operates within the EU; (2) drug manufacturers are allowed to block the sale of an imported product if its original packaging has been modified in a way other than what is necessary to permit its sale in the importing country; (3) member states are allowed to prohibit or limit exports to protect human life and public health; (4) manufacturers can manage their inventories of a given product in a member state, so long as they do not explicitly ban exports to other member states.

Following in the E.U.'s footsteps would require U.S. officials to build a regulatory scheme from scratch, which would likely blunt the impact. Or we could do what Pilon suggested and simply repeal the prohibition on parallel trading without introducing any formal system to regulate it.

So what would the parallel trade legislation sponsored by McCain and Klobuchar do?

The "Safe and Affordable Drugs from Canada Act of 2017" would crack the flood gates, not fling them open.

The bill tasks the Department of Health and Human Services with identifying licensed Canadian pharmacies that have existed for at least five years and that are willing to undergo unannounced U.S. inspections, submit their products for quality control tests, and agree to a grievance resolution process. American patients, meanwhile, wouldn't be able to order biological drugs, drugs that need to be refrigerated, or controlled substances. U.S. patients would still need a prescription from a U.S. doctor—and couldn't order more than a 90-day supply. The bill also prohibits re-selling Canadian drugs here in the U.S., and it doesn't seem to allow the establishment of drug importation businesses.

Considering that Canada is the only parallel trade partner the bill would allow, that Canada's drug prices are second highest in the world after ours, and that their population is 10 percent of ours, this bill seems tailored specifically for old people who want cheaper statins and antihypertensives.

If we want prices to come down in the U.S., we should probably just repeal the ban on parallel trading altogether and allow importation for both personal use and re-selling. This would force drug companies to renegotiate with the governments of Canada and Europe, which are only able to offer their citizens low prices because American citizens can't buy from anywhere else.

In the meantime, U.S. patients will continue to pay for both themselves and foreign beneficiaries of socialized medicine.